Well, I’ve hammered this point home once…
And I ain’t afraid to do it again…
If you want to get better at trading pin bars and improve your results, you MUST learn how to determine why they form in the market… No ifs, ands, or buts about it!
Sure, the size of the wick, where the pin forms – like at a technical level – and its overall appearance (where’s the body at? How big’s the wick?) all play a part. But, compared to the real reason a pin bar forms, these factors have a minimal say in whether the pin will cause a reversal.
So, what’s the real deal?
What really causes pin bars to form?
Let’s break it down to three main culprits…
- Trade Placing
- Closing Trading
90% of pin bars form due to the reasons above, with profit-taking pins leading the pack.
No wonder trading pin bars feels like you’re riding a roller coaster!
Now: Cracking the code on why a pin bar has made an appearance ain’t a walk in the park… it’s “well ard,” as us Brits would say. BUT, I’ve got a couple of tricks up my sleeve that could make things a tad easier for ya…
And guess what?
I’m feeling generous.
I’m gonna spill the beans and show you how to make these tricks work for you.
Let’s take a deep dive…
The BIG Problem With Trading Pin Bars
Feast your eyes on the pin bar below…
Seems like the perfect setup, right?
All the price action experts are nodding their heads, betting their bottom dollar on this bearish pin bringing about a market reversal. It’s got the works – a long wick, a petite body, and it’s cozied up right at a major resistance level.
So, it’s a no-brainer, isn’t it?
This pin should send prices in a tailspin.
But here’s the kicker…
Price just shrugs and keeps climbing!
The bearish pin didn’t even make it stumble.
Now, most folks might just shrug this off as a stroke of bad luck… Some pins just strike out; it’s a fact of life.
But hold up!
While it’s true that some pin bars fizzle out, there’s another reason this pin didn’t quite bring about the sea change it promised: Because the big banks were taking profits off their trades.
Whoa, plot twist!!
Here’s the deal:
About 95% of price action sites assume pin bars form for the same reason – traders buying and selling, hoping to cause a price reversal.
And sure, they’re not wrong: pins are born out of traders buying and selling – that’s the ABC of it (duh!). But let’s chew on this for a minute. Traders don’t always have the same motives, do they? Sometimes they buy hoping for a price reversal.
Other times, they’re just cashing in on a sell trade.
So, who are these traders pulling the strings?
Forex is a mixed bag of players – banks, retail traders, businesses, you name it – so who’s steering the ship?
- Is it us, the retail traders?
- Could it be the big dogs, the institutional traders at the banks?
- Or is it some company wheeling and dealing for business reasons?
Most self-proclaimed gurus don’t even consider these factors when looking at pin bars, but they’re instrumental in determining if a pin will flip the market.
Here’s the low-down: Most pin bars (a whopping 90%!) pop up due to banks buying or selling.
And the banks’ moves – placing trades (not so often), taking profits (pretty much all the time), and closing trades (also pretty rare) – are the biggest factors in whether these pins ultimately cause price to reverse and move the other way.
That’s why it’s crucial to think like the banks if you want to be a pin bar whiz.
Now take a gander at this seemingly ‘perfect’ pin.
Just like before, it’s got all the right stuff – a long wick, minuscule body, and it’s perched on a strong support level.
On paper, this is a dream pin.
But, surprise, surprise, it doesn’t cause a reversal… but why?
This pin failed not because it formed at the wrong technical level or didn’t have the right features. It failed because it formed by the banks taking profits off their trades – sell trades in this case.
Look where the pin popped up…
What do you think the banks, who’ve gone short, mind you, are going to do when they see a massive drop doubling or even tripling their profit? What’s their knee-jerk reaction:
- Pocket the profits?
- Sell again?
- Close up shop?
Put yourself in their shoes… what would YOU do if price nosedived, and you suddenly found yourself swimming in profits?
You’d want a piece of that pie, wouldn’t you?
Some might say “pocket the profits”, but most times, the big players – the banks – they’re just skimming a bit off the top of their trades. They ain’t closing because of the sheer size of the trade. And when they take profits, the banks gotta buy back some of what they sold, right?
This gets the price rising and, boom…
You’ve got yourself a stunning bullish pin bar sitting pretty at a rock-solid support level.
Starting to see why it’s a big deal to know why a pin bar pops up?
It’s the only factor that genuinely tells you the odds of a reversal.
We’ve seen it with the examples, haven’t we?
On the surface, both pins looked darn good. But under the hood, one pin had slim odds of sparking a big reversal ’cause it formed due to profit taking; the banks were hoping price would continue tumbling after it formed to make more profits.
So, now that you’ve got the scoop on why it’s important to suss out what causes a pin bar to form, let me show you a couple of tricks to figure it out on your own.
How To Figure Out Why A Pin Bar Has Formed – 2 Easy Ways
Now, here’s the deal:
Getting to the bottom of why a pin bar has formed ain’t exactly a walk in the park. And to be honest, it’s not something I can spill the beans on in just one article – or even a handful for that matter.
But hold your horses:
I do have a couple of nifty rules of thumb you can stick to, to dodge most of the dicey pin bars (the profit-taking pins) and instead find and trade more of the surefire pins – the ones created by the banks placing significant trading positions.
Ready to hear ’em?
Avoid Pins That Form After Sharp Rises/Declines
Looking to boost your pin bar results?
Steer clear of trading profit-taking pins – those that form when the banks are busy pocketing profits off their trades.
These pins have the lowest odds of triggering a lasting reversal since the banks are gunning for price to march on in the previous direction. They’re itching to earn more from their trades. So, shortly after the pin bar takes shape, price will flip and continue in the prior direction.
Profit-taking pins are a real bugbear because they’re the most prevalent type of pin bar.
In plain English: They crop up EVERYWHERE!
A hefty chunk, if not the majority, of the pins you spot and probably trade are profit-taking pins with little-to-no chance of sparking a substantial reversal. I’d hazard a guess that at least 60% of total pin bars are profit-taking pins – that’s how ubiquitous they are.
So, how do you give them a wide berth?
Well, the simplest strategy is to hit the brakes on trading pin bars that emerge after sharp rises or falls.
They’re popping up from the banks taking profits off their trades. And this happens like, nine times out of ten.
Let me break it down the way I did earlier…
When there’s a sharp rise, the banks’ profits go through the roof.
Naturally, their gut reaction is to grab some of that cash.
Why? They’re thinking ahead, securing the profits for future use. Could be for another whirl in the market, say, to place more buy trades down the line. Or it might be for stuff outside trading – banking shenanigans, you know?
But here’s the kicker: When they pocket the profits, price reverses. And that’s often when a pin bar pops up.
They often look stellar, just like the one above.
They’ve got all the bells and whistles we link with high probability pins – ginormous wick, opposite close – and they often show up at one or more critical technical points. But since they’re born out of profit-taking, these pins DO NOT stand a good chance of hitting the jackpot. Why?
Because what are the banks gunning for after they’ve taken profits?
They’re itching for price to keep moving IN THE SAME DIRECTION.
So after the pin takes shape, price might backtrack a smidge as they pocket the profits. But it’ll soon flip back and start climbing again because they’re hoping for price to keep shooting up.
And that’s exactly what goes down in our example…
After a wee bit of retracement, which plenty of pin traders interpret as a sure sign of a reversal, price does a U-turn, kick-starting another upswing.
Here’s the skinny: If you’re looking to step up your game, give profit-taking pins a wide berth.
I get it, not all pins popping up after drastic ups and downs are the banks cashing in on their profits, but a hefty chunk are. And you’d be doing yourself a solid by steering clear of ’em.
Stick with the pin bars sporting massive wicks, and spend some time pondering why they might have made an appearance in the market.
This strategy should help you sift out the feeble pins, saving you from a heap of losses.
And while we’re on the topic of massive wicks…
Look For Pins With Exceptionally Big Wicks
One piece of advice you hear time and time again with pin bars is to zero in on trading the pins with long wicks that jut out from the surrounding price action.
Ring any bells?
It’s a top-notch tip, and more often than not, it’ll keep you trading the right pins… well, at least most of the time.
My advice is along the same lines, but with a slight twist:
Instead of trading pin bars with respectably-sized wicks, you go for pins with enormous wicks.
I’m talking about wicks so colossal they don’t just protrude from the surrounding price action but are so glaringly obvious that anyone can spot them within a blink of seeing a chart.
Pins like these, for instance…
Seen these before?
This pin has a HUGE wick, anyone and everyone can easily spot with just a quick glance at the chart.
These pins typically form from the banks placing trades; that’s why they’re 1. so rare and 2. have such a big wick. The wick size tells you how many traders bought (or sold, in our case) when the pin was forming.
Remember: Banks can only buy or sell when thousands of traders are doing the opposite.
- Buying if they want to sell.
- Selling if they want to buy.
The more traders buying or selling, the more the banks can buy/sell themselves.
So, if a pin has a large wick, that reveals masses of traders bought or sold.
That, in turn, tells us the banks must have bought or sold a significant sum themselves to push price in the opposite direction against these traders to create the wick in the first place. This is why the wick plays a role in whether a pin causes a reversal or not:
It visually reveals via its size how much the banks bought or sold to make price reverse.
Keep your eye out for these pins going forward…
They don’t form often, but boy when they do, you can bet the reversal signals they generate are typically massive and they rarely fail.
With these two tips, finding powerful pins bars should be A LOT easier.
BUT, and I can’t stress this enough: You MUST learn why pin bars form.
It’s the #1 factor in whether they’ll be successful. Wick size and location (i.e: support or resistance) all play their part, yes – always check them. But it’s why the pin forms that’s so important and what ultimately determines if it’s a worthwhile trade or not.
So, focus on trading pins with especially big wicks, like I explained above…
That should improve your results and help you be more consistent trading pins.